Audit Committee Characteristics and Earnings Management Practices

Abstract

This study revisits the effectiveness of the audit committee independence and expertise in preventing earnings management practices.  Studies in other countries that have relatively stricter regulations showed the audit committee independence was effective to prevent earnings management.  Arguably, the practice may be different in Indonesia whose regulation is considerably more lenient.  On the other hand, studies related to audit committee expertise is rarely done in Indonesia.  This study utilized two of the earnings management models namely the Modified Jones Model and the Performance-Adjusted Modified Jones Model.  This study was limited to Indonesian listed manufacturing companies from 2009 to 2011.  Consistent for both earnings management models, the results show that audit committee independence is effective to prevent earnings management.  However, the results showed that audit committee expertise did not affect earnings management practices.  Although only approximately 39 percent of the audit committee members in Indonesian listed manufacturing companies were independent, the existence of those independence members enabled the audit committee to effectively conduct its monitoring role, especially in preventing earnings management.  Nevertheless, accounting and/or financial expertise might not determine the effectiveness of the audit committee’s monitoring role.